andrewA Freedom of Information request by Quilter has shown that HMRC investigates a quarter of the estates liable to pay Inheritance Tax each year. What do Executors need to do during an HMRC investigation and what steps can be taken to prevent an investigation in the first place?

In the 2018/19 tax year, HMRC investigated 5,537 estates for potential breaches. This figure represents a quarter of the estates liable to pay Inheritance Tax.

HMRC is more likely to open an investigation in estates where business or agricultural reliefs have been claimed, high value properties are being dealt with, and assets HMRC has knowledge of have been omitted from the Inheritance Tax Return. Values of residential properties are of particular interest, with HMRC opening investigations where properties appear to have been undervalued. In some cases, HMRC may argue that additional value should be attributed to properties or land with development or refurbishment potential. The likelihood of such a query being raised by HMRC is increased when the property in question has been left to relatives and the Residence Nil Rate Band has been claimed.

What do Executors need to do during an HMRC investigation?

Once an investigation has been opened, fact-finding documents and a questionnaire will be sent to the Executor for completion. It is for the Executor, with assistance from his or her professional agents, to prove that what he or she has done when administering the estate is correct.

Considering the volume of investigations, it can take a considerable period of time for HMRC to determine whether or not there has been a breach, further delaying the administration of the estate and preventing the Executor from discharging his or her duties. If an Executor is found to be in breach, HMRC can impose hefty penalties and, therefore, it is vital that Executors take reasonable care when acting and seek legal advice when necessary. 

As with most things in life, honesty is the best policy. If an Executor has acted in good faith after making reasonable enquiries, he or she has acted properly and should not be concerned about the investigation. 

What steps can Executors take to prevent an investigation in the first place?

While it is not possible to eliminate the possibility of an Inheritance Tax investigation (some estates are chosen at random), it is possible to take steps to improve compliance.

HMRC has far reaching powers and can access personal records, including bank statements, if it suspects fraud. It is important for Executors to complete thorough investigations of estates prior to submitting the Inheritance Tax Return to ensure that the information provided is accurate.

The risk of submitting unrealistic valuations for property can be mitigated by instructing a professional valuation rather than relying on an estimated value. In some circumstances it may be prudent to instruct a second valuation to ensure that the value submitted in the Inheritance Tax Return is realistic. In the event that an Inheritance Tax investigation is opened, professional valuations will assist an Executor in proving that he or she acted correctly.

Generally speaking, Executors do not intend to defraud HMRC. Often, investigations stem from Executors’ lack of experience and misunderstanding of the duties and procedures required. Nonetheless, the increase of Inheritance Tax investigations highlights the importance of seeking specialist legal advice when acting as an Executor to ensure full compliance with HMRC.

Specialist Executry (Probate) Solicitors, Edinburgh

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